Apps & Software

The Profitable Future of Free Mobile Apps

Apps continue to move toward a world in which people play now and pay later.

The total number of mobile app downloads is set to exceed 100 billion this year, according to new data from Gartner (IT). Apps that cost money have always made up a tiny percentage of overall downloads, and paid-app ranks are expected to make up an even smaller percentage in years ahead. By 2017, Gartner predicts, nearly 95 percent of downloads will be for free apps, up from almost 90 percent last year.

This doesn’t mean there’s less money to be made—people will spend almost three times as much on apps in 2017 as they do now. But it’s going to come from in-app purchases such as extra lives in gaming apps or the subscription fee in Pandora (P) that provides music streaming without advertisements. Those will account for nearly half of the industry’s revenue four years from now, up from 11 percent in 2012. It’s worth noting that the Apple (AAPL) app store is already much further down this path. In-app purchases account for 76 percent of all revenue for iOS apps, according to Distimo, an app analytics company.

As developers experiment with new revenue models for applications, they’d do well to look at the gaming industry. Mobile games make up nine of the 10 top-grossing apps in Apple’s app store (Pandora is the exception). Only one of those charges for a download: Infinity Blade 3, which costs $6.99.

The gold standard in this world is Candy Crush Saga. According to industry analyst Michael Pachter, the percentage of the game’s users who spend any money is in the “high single digits.” Among people who do, says Pachter, their average yearly cost is $40. That translated to $13.6 million in revenue in July, according to Superdata, a firm that tracks the gaming industry.

Getting that many people to spend money remains rare. A game can be sustainable on revenue raised from only two percent of its users, says Eric Goldberg of Crossover Technologies. Game developers call this “the whale effect,” or squeezing lots of cash from a few people and letting everyone else come along for the ride. (Casinos are notorious whale hunters.)

People who never pay directly do create revenue for developers, because advertisers will pay to reach them. This means that app companies may be torn between trying to bring in free users and trying to get more money from the whales. This raises some interesting ethical questions, as many developers acknowledge that designing free apps that entice people to pay can get slimy very quickly.